Page 600 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
26 Determination of taxable income derived from farming.
(1) The taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as it is derived from such operations, be determined in accordance with the provisions of this Act but subject to the provisions of the First Schedule.
(2) In the case of any person who has discontinued carrying on pastoral, agricultural or other farming operations and is still in possession of any livestock or produce, or has entered into a ‘sheep lease’ or similar agreement relating to livestock or produce, which has been taken into account and in respect of which expenditure under the provisions of this Act or any previous Income Tax Act has been allowed in the determination of the taxable income derived by such person when such operations were carried on, the provisions of this Act, but subject to the provisions of paragraphs 1, 2, 3, 4, 5, 6, 7, 9, or 11 of the First Schedule, shall continue to be applicable to that person in respect of such livestock or produce, as the case may be, until the year of assessment during which he disposes of the last of such livestock or produce, notwithstanding the fact that such operations have been discontinued.
4. Application of the law
4.1 Farming operations
The First Schedule applies to any person who derives taxable income from carrying on pastoral, agricultural or other farming operations. Such a person can include an individual (whether farming alone or in partnership), a deceased estate, an insolvent estate, a company, a close corporation or a trust.
The expression ‘farming operations’ is not de ned in the Act and should be interpreted according to its ordinary meaning as applied to the subject matter with regard to which it is used.*
The question of whether a person is carrying on farming operations is one of fact† and must be decided considering all the facts of a particular case.
Farming and agriculture are de ned in the Merriam-Webster’s dictionary‡ as—
‘the science, art, or practice of cultivating the soil, producing crops, and raising livestock and in varying degrees the preparation and marketing of the resulting products’.
However, every activity in the nature of farming will not constitute ‘farming operations’. This was con rmed by Heher AJA in the Supreme Court of Appeal in C: SARS v Smith when he stated the following:§
‘In ordinary parlance the phrase ‘carrying on farming operations’ is capable of several meanings. In the context of s 26 (1) it could mean simply ‘a particular form or kind of activity’ or it could bear a more commercial nuance, ‘a business activity or enterprise’.
‘The Act is directed to the taxation of pro t-making activities. There is no apparent reason why the legislature should have intended a taxpayer who farms as a hobby or who dabbles in farming for his own satisfaction to receive the bene ts conferred by the First Schedule.’
An example of the above principle can be found in ITC 1324¶ in which it was held that a grower who merely intended to sell crops surplus to his needs was not carrying on farming operations.
Thus, in order to fall within the First Schedule a farming operation needs to be a trade of the taxpayer and there must be an overall pro t-making intention.
It is now settled law that the test for determining whether a taxpayer is carrying on farming operations is a subjective one, that is, one based on the taxpayer’s intention. This was held to be the case in the Smith case above in which Heher JA stated that—**
‘a taxpayer who relies on s 26 (1) is (over and above proof that he is engaged in an activity in the nature of farming) only required to show that he possesses at the relevant time a genuine intention to carry on farming operations pro tably. All considerations which bear on that question including the prospect of making a pro t will contribute to the answer, none of itself being decisive’.
The court went on to cite ITC 1185 in which Miller J stated the following:††
‘It is no dif cult matter to say that an important factor is: what was the taxpayer’s intention when he bought the property? It is often very dif cult, however, to discover what his true intention was. It is necessary to bear in mind in that regard that the ipse dixit‡‡ as to his intent and purpose should not lightly be regarded as decisive. It is the function of the court to determine on an objective review of all the relevant facts and circumstances, what the motive, purpose and intention of the taxpayer were . . . This is not to say that the court will give little or no weight to what the taxpayer says his intention was, as is sometimes contended in argument on behalf of the Secretary in cases of this nature. The taxpayer’s evidence under oath and that of his witnesses, must necessarily be given full consideration and the credibility of the witnesses must be assessed as in any other case which comes before the court. But direct evidence of intent and purpose must be weighed and tested against the probabilities and the inferences normally to be drawn from the established facts.’
* E A Kellaway Principles of Legal Interpretation of Statutes, Contracts and Wills (1995) Butterworth’s Durban at 224.
† ITC 1319 (1980) 42 SATC 263 (EC) at 264, cited with approval in CIR v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A), 57 SATC 178 at 183.
‡ http://www.merriam-webster.com/dictionary/agriculture [Accessed 12 February 2013]. § 2002 (6) SA 621 (SCA), 65 SATC 6 at 9 and 10.
¶ (1980) 42 SATC 288 (Z).
** Above at 65 SATC 13.
†† (1972) 35 SATC 122 (N) at 123–4.
‡‡ According to the Glossary of foreign terms by J Silke and Justice MM Corbett which forms part of the South African Tax Cases Reports published by LexisNexis, Durban, the expression ‘ipse dixit’ means ‘ He himself said it; a bare assertion or statement without proof, resting on the authority of the person who made the assertion or statement’.
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